Before you start looking for a home, you will need to know how much you can actually spend. The best way to do that is to get prequalified for a mortgage. To get prequalified, you just need to provide some financial information to your mortgage banker, such as your income and the amount of savings and investments you have. Your lender will review this information and tell you how much we can lend you. This will tell you the price range of the homes you should be looking at. Later, you can get preapproved for credit, which involves providing your financial documents (W-2 statements, paycheck stubs, bank account statements, etc.) so your lender can verify your financial status and credit.
Buying a home is often one of the most expensive endeavors one will take throughout their life, so it’s not surprising that saving for a down payment remains a major hurdle for many Americans on their path to homeownership. But although a 20 percent down payment is considered ideal, it’s not actually as common as you might think, nor is it a necessity to buying a home.

Why? Because, over shorter timeframes, market downturns can devastate savings goals. Imagine that you put $20,000 in the market between 2005 and 2007, on your way to an expected $40,000 down payment by 2009. Between mid-2007 and early 2009, U.S. markets lost roughly half their value. In other words, that $20,000 sum would have shrunk to just $10,000, assuming you added no new funds – no doubt crushing your dream of buying a home in 2009.


You won't have to pay PMI: By making a larger down payment, you can also avoid paying private mortgage insurance (PMI). With a smaller down payment -- say 3.5% -- your mortgage lender will want some financial insurance that you'll pay the larger loan off on time, and in full. That increases the monthly mortgage payments you'll make if you make a smaller down payment - and that's a problem a homebuyer who makes a 20% down payment doesn't have.
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Pre-approval requires the lender to pull the credit information (see Step 1) and assess your financial situation. The lender will then give you a letter that states the amount they would be willing to lend you. If you get in a multiple-offer scenario, being pre-approved may give you an edge because the seller will have more confidence that you will be approved for a loan large enough to purchase their home.
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Why? Because, over shorter timeframes, market downturns can devastate savings goals. Imagine that you put $20,000 in the market between 2005 and 2007, on your way to an expected $40,000 down payment by 2009. Between mid-2007 and early 2009, U.S. markets lost roughly half their value. In other words, that $20,000 sum would have shrunk to just $10,000, assuming you added no new funds – no doubt crushing your dream of buying a home in 2009.
If you are able to come up with a 20 percent down payment, you’d reap quite a few benefits. Putting that larger amount down lets you avoid paying private mortgage insurance (PMI), it can help you qualify for a lower interest rate (which can help you save thousands over the life of your loan), it’ll give you more equity faster, and it will result in a smaller monthly mortgage payment. Depending on where you’re looking to buy a home, a larger down payment might also help you be a competitive buyer and stand out to the seller if there are multiple offers on the home.
Down payment size is a function of three overlapping factors: your desired initial loan-to-value (LTV) ratio, your time horizon (when you want to buy), and local housing market conditions. When people talk about budgeting for a future home purchase, they generally refer to list prices: “We’re willing to pay $300,000,” or “We can afford $250,000, but no more.”
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For lenders, whether it’s a bank, credit union, or other type of lender, a down payment helps offset their risk in making a mortgage loan because it means the borrower immediately has some skin in the game–an investment to protect. The more money you pay down, the less the lender stands to lose if you default on payments and the lender has to foreclose, especially early in the loan term. This is why borrowers who put less than 20 percent down usually have to get PMI, as it protects lenders by repaying the unpaid portion of the loan if the borrower defaults.
Your house might be the single biggest purchase you ever make, but it won’t be the only big-ticket item you ever buy. Unless you can comfortably live without a car, you’re likely to buy a new or used vehicle every few years. If you have kids, you’ll need to budget for their education. Once you’re ensconced in your home, you’ll probably want to make sensible improvements that enhance its value or accommodate your growing family. And, all the while, you need to have enough set aside for the unexpected.
Down payments also protect buyers from negative equity if the market suffers a downturn. If you put 3 percent down and the market value of the home soon falls by 5 percent, you’ll be upside down on your mortgage by 2 percent; you’ll owe more than what the house is worth. However, if you had put down 20 percent, then you’ll still have equity in the home. A substantial down payment to reduce negative equity risk is not only attractive to lenders, but is also helpful in the event that owners need to sell the home for some reason.
Beyond program-specific requirements, these special loans have some important drawbacks. Perhaps most importantly, they carry private mortgage insurance (PMI) premiums until LTV reaches 78% (though you can formally request PMI removal at 80% LTV). In some cases, these annual premiums can exceed 1% of the total loan value – an extra $3,000 per year on a $300,000 loan, for instance.
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.
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